Preparing Future-Ready Professionals

Accounting Transparency & Macroeconomic Performance

Chanwoo Lee | July 29, 2020

The focus on corporate transparency has been on the rise globally since the Enron collapse crisis in 2001, which created turmoil in the financial market. The US enacted the Sarbanes-Oxley Act of 2002 to strengthen external audit on accounting. In Korea, since the financial crisis of 1997-1998, accounting transparency is being strengthened and rigorous external audits have been put in place. However, there is further room for improvement in terms of reliability and accountability.

Until recently, many studies have proven that high levels of accounting transparency contribute to increased corporate liquidity and lower cost of capital by attenuating information asymmetry. Others have shown that transparent accounting information leads investment and employment towards high performing and efficient corporations. With respect to the relationship between accounting transparency and the macro-economy, past studies have focused on the macro to micro path. That is, favorable economic conditions lead to better corporate performance.

However, there is a need to demonstrate micro to macro impact, which would go on to prove that corporate accounting transparency affects macroeconomic performance. It aims to confirm the notion that “sound accounting makes economic fundamentals sound.” That was the objective of this study.

The Study's Key Elements

The study consists of three components. First, a survey was conducted with key stakeholders, including CPAs, academia, businesses, and government officials, regarding the level of awareness and emphasis on accounting transparency. Secondly, the study measured the effect of accounting transparency on firm-level performance in Korea. This was done by first measuring the accounting transparency of Korea’s companies listed on the stock market. Then an empirical analysis was done on the relationship between firm-level performance and accounting transparency. Thirdly, an analysis on the information value of corporate accounting information in making macroeconomic forecasts was conducted. This was to prove that transparent accounting information can be a useful tool in forecasting economic indicators and thereby managing macroeconomic policies.

Key Findings

The survey on accounting transparency components and economic performance, the first component of the study, found that:

  • conformity to accounting standards and competency of external audits have significant positive effects on corporate management performance;
  • independence and competency of external audits as well as conformity to accounting standards have some positive effects on economic policy implementation; and
  • corporate management performance has significant positive effect on economic policy implementation performance.

In summary, the survey results showed that enhanced accounting transparency results in improvements in corporate management performance and contributes to economic policy performance.

The second component of the study, which was to show the effects of accounting transparency on Korea’s firm-level and overall macroeconomic performance, comprised of two empirical analyses. The first one, which was on the relationship between accounting transparency and firm-level management performance, measured the accounting transparency of Korean firms. 589 companies are listed on KOSPI, Korea’s primary stock market, and data from the past four years for all these companies were used to measure accounting transparency. Key indicators in measuring accounting transparency included both qualitative and institutional elements, including scope and quality of disclosed information, corporate governance, degree and level of audits, and others.

To show the results of accounting transparency measurement, a scoring system was used. The average score of accounting transparency of Korea’s listed companies was 57 points out of 100. Results, as shown in Graph 1, are that accounting transparency in larger companies is generally higher than in small- and medium-sized enterprises (SMEs), and companies in the services sector scored higher than those in the manufacturing sector.

With the measured transparency score of Korean companies, the study examined the relationship between firm-level management performance and accounting transparency. Using Korea Information Service Value data, dependent variables, including corporate profitability, growth, and productivity indicators, were assessed vis-à-vis accounting transparency as the independent variable. Empirical models are:

Dependent variables may be affected by corporate scale (large, medium, and small) and industry-specific factors (services, manufacturing, and others). Dummy variables are added to identify those effects. These are:

Results of the relationship between accounting transparency are demonstrated in Table 1.

  • Corporate performance indicators, including operating profits, total sales, and sales per employee, a proxy variable of productivity, have 1-5% statistical significance with accounting transparency. This means that if a company’s accounting transparency score improves by 10 points, operating profits may increase by 3-4%, total sales may increase by 0.4-2%, and sales per employee, or productivity, may increase by 0.2-0.3%.
  • Regarding industry and size of companies, corporate performance of manufacturing sector companies was affected more by accounting transparency. In terms of size, performance in large companies was affected slightly more than SMEs but only by a small margin.

The second empirical study conducted was how much statistically significant information value does corporate accounting information have in forecasting macroeconomic variables like GDP. As corporates are key macroeconomic agents, corporate performance should have information value in macroeconomic forecasting. If that is the case, transparent accounting information is a useful tool to forecast macroeconomic conditions and manage policies. For this analysis, corporate and macroeconomic data between the years 2000 and 2019 were used. An auto-regressive form of a now-casting model was applied to use t-1 quarter information to forecast GDP in t quarter. Then the discrepancy between the forecasted and actual values was analyzed based on mean absolute error (MAE) and root mean squared error (RMSE).

Results shown in Table 2 demonstrate that corporate accounting information, including growth rates of aggregate sales and profits, has significant predictability in GDP forecasting. The KOSPI index and Business Survey Index (BSI) had the lowest margin of error, but corporate accounting information had similar or lower margin of error than the CCI (Coincident Composite Index) and CLI (Composite Leading Index). Even when effects from the 2008 global economic crisis, or a downward trend in potential economic growth was applied, the value of corporate accounting information in GDP forecasting was statistically high.


This study set out to test the assumption that accounting transparency leads to improved corporate management outcome, resulting in higher macroeconomic performance. Results have demonstrated that there is a significant micro to macro relationship between corporate accounting transparency and macroeconomic performance. This study has found that accounting transparency positively affects corporate growth, profitability, and productivity. Also, it is shown that corporate accounting information is a useful indicator in making macroeconomic forecasts.

Transparency in accounting is one of the key elements to ensure mid- to long-term growth potential and competitiveness on the national level. In the face of rapid demographic changes and sluggish investments, the increase in total factor productivity through innovative activities and changes in institutions, including accounting transparency, is required for sustainable growth. This study has shown that institutional reforms contribute to improved productivity resulting in increased growth potential and competitiveness. As a result, the proposition “sound accounting makes economic fundamentals sound” can be conclusively established.

 *The research was conducted and commissioned by the Korean Institute of CPAs but this article is purely author’s and does not represent the view, opinion, official policy or position of the KICPA.


Chanwoo Lee

Chanwoo Lee is a Visiting Professor at the Seoul National University and Senior Research Fellow at the Korea Development Institute, a government think-tank. Mr. Lee served for over 30 years in the Korean government, primarily in the Ministry of Economy and Finance, most recently as the Deputy Minister. He holds an MBA from Yale University, and M.A. in Public Administration and B.A. in Political Science from the Seoul National University.


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